Explain the differences between partnerships and Limited Liability Partnerships (LLPs) while considering the advantages, if any, that LLPs may have over other forms of business vehicle.

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Business Law                                                    LW22012

Coursework 1

Task:  Limited Liability Partnerships (“LLPs”) were introduced in 2000 in the expectation that there would be great commercial demand for them.  This has turned out not to be the case.  In practice, LLPs are found mostly in the accounting profession, though some solicitors’ firms have adopted the LLP status.  Explain the differences between partnerships and LLPs while considering the advantages, if any, that LLPs may have over other forms of business vehicle.  Finally, consider why the demand for them has not been as great as anticipated and the extent to which LLPs are in fact necessary.

Introduction

The Limited Liability Partnerships Act 2000 received Royal Assent on 20th July 2000, and came into influential existence on the fourth month of 2001.  The 2000 Act created Limited Liability Partnerships as a new legal business entity and set the stage for it to develop to a well established business vehicle, that would drive the business to profit, with, as the name suggests, limited liability for its founding members.  The LLP joins the pool of business, with three other main business mediums, which include limited companies (Sony), partnerships (Dundas and Wilson) and sole traders (an early Richard Branson).  It is worth noting that this is not the first attempt to consider limited liability within partnership law, as early as 1857 a commission headed by Bellenden Kerr consider the idea, but with little avail.  Two or more individuals, corporations, trusts or other entities can join together to engage in business as an LLP.  The LLP vehicle was introduced as a result of the longstanding fear that professional partnerships, mainly accountants and solicitors, were vulnerable to massive “deep pocket” claims and so require limited liability to conduct their business without cautiously looking behind their shoulders.  These fears were first detected following the high profile corporate collapses in the 1990’s, such as Maxwell and such fears were boosted by the more recent, Andersen and Enron scandal.  Concerned that large firms, such as Ernst & Young, would resort to the Jersey Limited Liability to obtain protection and a need to maintain commercial competitiveness, the Governments elf’s at Whitehall and Westminster turned to light bulb ideas and came up with the seemingly good idea of combining the organisational flexibility and tax status of partnerships and the corporate shell of companies, with limited liability thrown in as a bonus, to create LLPs.  It seems that the best attributes of traditional business entities have been handpicked and combined to create the near perfect business athlete, that is LLPs; but is the result of such a creation able to fit into the world of business or is it more of a Frankenstein, which few will love and adopt but others will reject.  In this essay I will discuss differences that exist between general partnerships and LLPs, along with the advantages that LLPs may have over other business entities.  Also I will examine the demand and necessity of such a business form.

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Discussion

It is important to consider that limited liability is not the only addition to this new form of business vehicle. Other fundamental differences lie between LLPs and the more traditional forms of business, some of which will benefit an LLP.

Taxation and the partnership relationship are the two common factors of LLP’s and partnerships, and are advantageous to both.  On 7th March 2001 the Inland Revenue made the decision that LLPs will be considered general partnerships, for tax purposes.  These arrangements confirmed that the LLP itself will not be liable for taxation on profits arising from the ...

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